Chap 006

Chapter 06 - Merchandising Activities
Chapter 06
Merchandising Activities
True / False Questions
1. Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the
balance sheet.
True False
2. The operating cycle of a merchandising company consists of (1) purchases of merchandise;

(2) sales of the merchandise; and (3) collection of accounts receivable.
True False
3. Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage,

theft, and sales of inventory.
True False
4. In a perpetual inventory system, when merchandise is purchased, it is debited to an account

called Purchases.
True False
5. In a periodic inventory system, the Cost of Goods Sold account may be created during the
closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the
Purchases account.
True False
6. Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income
statement.
True False
6-1
7. Net Sales is computed as total sales revenue less sales returns and allowances less sales
discounts.
True False
8. The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be
closed by crediting these accounts and debiting Income Summary for each account.
True False
9. Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross
sales.
True False
10. The accounting cycle of a merchandising business is the length of time covered by the
company's income statement.
True False
11. Today, most large merchandising companies use a perpetual inventory system.
True False
12. Inventories are assets that a company holds for sale in the ordinary course of business.
True False
13. In preparing monthly bills to be sent to individual credit customers, the billing department
will use the accounts payable subsidiary ledger, rather than the general ledger.
True False
6-2
14. In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept
up-to-date throughout the accounting period.
True False
15. A perpetual inventory system requires the capability of recording the cost of the goods
sold in individual sales transactions.
True False
16. Wholesalers buy from retailers and sell to the general public.
True False
17. Under the periodic inventory system, no effort is made to keep up-to-date records of either
Inventory or Cost of Goods Sold as transactions occur.
True False
18. The manager of National Software wants to know how many Microsoft Excel programs
the store sold in June. This information is contained in the Inventory controlling account.
True False
19. In a retail department store with an efficient perpetual inventory system, the quantities of
goods actually on hand are probably somewhat more than the quantities indicated in the
accounting records.
True False
20. When using a perpetual inventory system, the Purchases account is debited when
merchandise is acquired.
True False
6-3
21. In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept
True False
22. In a periodic inventory system, the ending inventory can be determined from the
accounting records, and a physical count of the merchandise on hand will confirm the
amount.
True False
23. In a periodic inventory system, the cost of goods sold is determined by the following end-
of-period computation: Beginning Inventory + Purchases - Ending inventory = Cost of Goods
Sold.
True False
24. Under the perpetual inventory system, two entries are required when goods are sold.
True False
25. If ending inventory and cost of goods sold are added together, they should equal gross
profit.
True False
26. Instead of paying for merchandise purchased on account, Olympic Corp. returned this
merchandise to the supplier. Olympic should record this transaction by debiting Accounts
Payable and crediting Sales Returns and Allowances.
True False
True False
6-4
28. A large company with many different kinds of low-cost items would tend to use a
perpetual inventory system.
True False
29. The average gross profit margin is a measure of relative profitability.

True False
30. If ending inventory and cost of goods sold are added together, they should equal cost of
goods available for sale.
True False
Multiple Choice Questions
31. Operating income is:

A. A measure of profitability after deducting cost of sales from net sales.
B. A measure of profitability after deducting cost of sales and all expenses incurred in
operating the business from net sales.
C. A measure of liquidity after deducting cost of sales from net sales.
D. The equivalent of net sales.
32. Sales discounts and allowances:

A. When properly recorded will reduce net profit.
B. When properly recorded will increase net profit.
C. Will not affect net profit.
D. Are always immaterial and need not be recorded.
33. Which account listed below is classified as a contra-revenue account?

A. Cost of Goods Sold.
B. Gross profit.
C. Sales Discounts.
D. Purchases.
6-5
34. The Cost of Goods Sold account is closed by:

A. Debiting Cost of Goods Sold and crediting Income Summary.
B. Debiting Cost of Goods Sold and crediting Retained Earnings.
C. Debiting Income Summary and crediting Cost of Goods Sold.
D. Debiting Retained Earnings and crediting Cost of Goods Sold.
35. Merchandising companies that are small and do not use a perpetual inventory system may
elect to use:
A. A physical inventory system.
B. A periodic inventory system.
C. An inventory shrinkage method.
D. An inventory subsidiary ledger system.
36. Which of the following would not tend to make a manufacturer choose a perpetual
inventory system?
A. Management wants information about quantities of specific products.
B. A low volume of sales transactions and a computerized accounting system.
C. A high volume of sales transactions and a manual accounting system.
D. Items in inventory with high per unit costs.
37. Which of the following should not be classified as inventory in the balance sheet of a
large automobile dealership?
A. Pickup trucks offered for sale.
B. Used cars taken in trade and offered for sale on the company's used-car lot.
C. Spark plugs, oil filters, and other parts which are intended for use by the service
department in repairing and servicing customers' cars.
D. "Company cars" provided to specific company executives for their personal use.
38. Which of the following factors would suggest the use of a perpetual inventory system?
A. A small company.
B. A high volume of many different, low-cost items.
C. A desire to minimize record-keeping requirements.
D. Only annual reporting is required.
6-6
39. Which of the following businesses is likely to have the shortest operating cycle?
A. A food store.
B. A department store.
C. An art store.
D. A car store.
40. Which of the following companies would be more likely to use a periodic inventory
system?
A. IBM.
B. 1st Bank of New York.
C. Sears.
D. A newspaper stand.
41. Sales revenue is recognized in the period in which:

A. Merchandise is delivered to the customer.
B. The customer orders the merchandise.
C. Cash payment is received by the seller.
D. Purchases are made to replace the merchandise sold.
42. Which of the following companies would be more likely to use a perpetual inventory
system?
A. Corner deli.
B. Home Depot.
C. James Dean, CPA.
D. A manufacturer of custom sailboats.
43. Which of the following appears in the income statement of a merchandising business, but
not in the income statement of a business that renders only services?
A. Interest revenue.
B. Gross profit.
C. Advertising expense.
D. Income tax expense.
6-7
44. Which of the following factors would suggest the use of a periodic inventory system?
A. A small company.
B. A high volume of sales and a manual accounting system.
C. Neither a small company or a high volume of sales and a manual accounting system.
D. Both a small company and a high volume of sales and a manual accounting system.
45. Gross profit is the difference between:

A. Net sales and the cost of goods sold.
B. The cost of merchandise purchased and the cost of merchandise sold.
C. Net sales and net income.
D. Net sales and all expenses.
46. The credit term 2/10, n/30 means:

A. That after 10 days 2% interest is charged.
B. That there is a 10% discount if payment is received within 30 days.
C. That there is a 2% discount if payment is received within 10 days, otherwise, full payment
is due within 30 days.
D. There is a 10% discount if paid immediately and 2% if paid within 30 days.
47. The basic purpose of a subsidiary ledger is to:

A. Provide a chronological record of all business transactions.
B. Provide details about the individual items comprising the balance of a general ledger
account.
C. Enable accountants to prepare financial statements.
D. Provide persons outside of the organization with detailed information about the company's
operations.
48. Under the perpetual inventory system which journal entry would indicate a purchase of
merchandise?
A. Debit, Inventory and credit, Cash.
B. Debit, Purchases and credit, Cash.
C. Debit, Costs of Goods Sold and credit, Inventory.
D. Debit, Inventory and credit, Cost of Goods Sold.
6-8
49. The purchasing agent of Superb Service Co. wants to know the dollar amount of inventory
purchased on account during the year from a particular supplier. This information can be
found most easily in Superb Service's:
A. Inventory subsidiary ledger.
B. Accounts payable controlling account.
C. Inventory controlling account.
D. Accounts payable subsidiary ledger.
50. Which of the following credit terms is the most advantageous to the purchaser of
merchandise?
A. 1/10, n/30.
B. 5/10, n/60.
C. 2/10, n/30.
D. 5/10, n/20.
51. Cumberland, Inc. has applied to its bank for a loan. The bank asks Cumberland's
controller about the total amount of the company's accounts receivable. Assuming that all
accounting records are up-to-date, the controller can best answer this question by referring to:
A. The Income Statement.
B. The Accounts Receivable controlling account.
C. The Accounts Receivable subsidiary ledger.
D. Last year's Balance Sheet.
52. In a perpetual inventory system:

A. Merchandising transactions are recorded as they occur.
B. No effort is made to record the Cost of Goods Sold until year-end.
C. Entries are made in the Cost of Goods Sold account whenever merchandise is purchased or
sold.
D. The need for ever taking physical inventory is eliminated.
6-9
53. Net sales is calculated by:

A. Subtracting cost of sales from sales.
B. Subtracting sales returns and sales discounts from sales.
C. Subtracting sales returns, cost of sales, and sales discounts from sales.
D. Subtracting gross profit from sales.
54. In a perpetual inventory system, two entries usually are made to record each sales
transaction. The purposes of these entries are best described as follows:
A. One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
B. One entry records the purchase of the merchandise, and the other records the sale.
C. One entry records the cost of goods sold, and the other reduces the balance in the Inventory
account.
D. One entry updates the general ledger, and the other updates the subsidiary ledgers.
55. In a periodic inventory system, which of the following accounts may be closed by debiting
Cost of Goods Sold?
A. Sales, Inventory (beginning), and Gross Profit.
B. Inventory (beginning) and Purchases.
C. Purchases and Inventory (ending).
D. Sales, Inventory (beginning), and Cost of Goods Available for Sale.
56. In comparing a perpetual inventory system with a periodic inventory system, which of the
following statements is not correct?
A. Most large companies use perpetual inventory systems.
B. A periodic system does not include an inventory subsidiary ledger.
C. The perpetual method is easier to apply in a manual accounting system.
D. Regardless of the system in use, most businesses take a physical inventory at least once a
year.
6-10
57. Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance
in the Inventory controlling account is $1,200,000. Assuming that the inventory records have
been maintained properly, a year-end physical inventory:
A. Is unnecessary.
B. Is needed to establish the ending inventory, as the $1,200,000 balance in the Inventory
controlling account represents the beginning inventory.
C. Probably will indicate more than $1,200,000 in merchandise on hand.
D. Probably will indicate less than $1,200,000 in merchandise on hand.
58. Jayson Products uses a perpetual inventory system. At year-end, the Inventory account
had a balance of $280,000, but a complete year-end physical inventory indicated goods on
hand costing only $273,000. Jayson should:
A. Reduce its cost of goods sold by $7,000.
B. Record a $7,000 current liability.
C. Reduce the balance in its Inventory controlling account and inventory subsidiary ledger by
$7,000.
D. Reduce the balance in the Inventory controlling account and record a current liability, both
in the amount of $7,000.
59. The cost of delivering merchandise to the customer is:

A. Part of cost of goods sold.
B. Used in the calculation of net sales.
C. An operating expense.
D. A reduction of gross profit.
60. In a periodic inventory system, the cost of goods sold is:

A. Recorded as sales transactions occur.
B. Determined by a computation which is performed at year-end, after the taking of a
complete physical inventory.
C. Equal to the beginning inventory, plus purchases made during the period, less sales revenue
for the period.
D. Determined by subtracting the balance in the Gross Profit account from the amount of net
sales.
6-11
61. In a periodic inventory system, the formula used in computing the cost of goods sold may
be summarized as follows:
A. Beginning inventory + purchases - ending inventory.
B. Beginning inventory + purchases - net sales.
C. Ending inventory + purchases - net sales.
D. Balance in the Cost of Goods Sold account, less the balance in the Inventory Shrinkage
account.
62. Periodic inventory systems are used primarily by:

A. Small businesses with manual accounting systems.
B. Large manufacturing companies.
C. Small businesses that sell a low volume of high-priced items.
D. Companies that sell a high volume of low-priced items and record sales transactions on
point-of-sale terminals.
63. Inventory shrinkage is not caused by:

A. Shoplifting.
B. Breakage.
C. Price reductions by competitors.
D. Spoilage.
64. Which of the following statements about a periodic inventory system is not correct?
A. These systems are used primarily by small businesses with manual accounting systems.
B. The system does not include an up-to-date inventory ledger.
C. The balance in the Inventory account remains unchanged until the end of the period.
D. The Cost of Goods Sold account is updated as sales transactions occur.
65. The cost of the transportation of inventory purchased:

A. Are expensed in the current period.
B. Increases income.
C. Becomes part of the cost of inventory.
D. Reduces the sales price.
6-12
66. A company's gross profit rate is computed by dividing:

A. Net sales by gross profit.
B. Cost of goods sold by gross profit.
C. Gross profit by the cost of goods sold.
D. Gross profit by net sales.
67. Regal Artworks Co. records purchases net of all available purchase discounts. If the
company makes payment after the discount has expired, the entry to record the payment
should include a:
A. Debit to Purchase Discounts Lost.
B. Credit to Purchase Discounts Lost.
C. Debit to Sales Discounts.
D. Credit to Sales Discounts.
68. To arrive at net sales:

A. Add sales discounts to sales.
B. Subtract the cost of goods sold from the sales price.
C. Subtract sales returns and sales discounts from sales.
D. Subtract accounts receivable from sales.
69. As a retailer, which of the following percentages is the least attractive to you?
A. Gross profit of 30%.
B. Cost of goods sold as a percentage of net sales equal to 70%.
C. Gross margin of 30%.
D. Sales markup of 30% over cost.
70. Bernice Beverages is not satisfied with the quality of merchandise purchased from Reade
Supplies. If American Supplies agrees to settle this matter by granting Bernice Beverages a
sales allowance, Bernice Beverages will:
A. Return the entire shipment to Reade Supplies and receive a full refund.
B. Return only that portion of the merchandise that it is unable to sell within the discount
period.
C. Keep the merchandise, but pay a reduced purchase price.
D. Keep the merchandise and sell it at a reduced sales price.
6-13
71. The Sales Returns and Allowances account is debited when:

A. Merchandise is returned to a supplier.
B. Merchandise is returned by a customer.
C. Payment is made to a supplier within the discount period.
D. An account receivable is collected within the discount period.
72. If sales discounts are shown as a separate item in financial statements, they should be
shown as a (n):
A. Deduction from accounts receivable.
B. Deduction from gross sales revenue.
C. Operating expense.
D. Current liability.
73. All of the following accounts normally have debit balances except:
A. Transportation-in.
B. Cost of Goods Sold.
C. Sales Returns & Allowances.
D. Purchase Returns & Allowances.
74. The gross profit margin:

A. Is the dollar amount of gross profit expressed as a percentage of cost of sales.
B. May indicate popular products and successful marketing strategies.
C. Must be computed for the business as a whole rather than for specific sales departments.
D. Is equal to cost of goods sold plus gross operating expenses.
75. The basic purpose of offering customers cash discounts such as 2/10, n/30 is to:
A. Increase sales.
B. Reduce net sales.
C. Speed up the collection of accounts receivable.
D. Focus management's attention upon customers that fail to take advantage of all available
cash discounts.
6-14
76. When making sales, the sales taxes received are:

A. Revenue.
B. A liability.
C. An expense if incurred.
D. A reduction in inventory value.
77. Emerald Co. uses a perpetual inventory system and records purchases of merchandise at
net cost. The company recently purchased 200 compact discs at an invoice price of $6,000
and terms of 2/10, n/30. Half of these discs had been mislabeled and were returned
immediately to the supplier. The journal entry to record payment of this invoice after the
discount period has expired will include a:
A. Debit to Inventory for $3,000.
B. Credit to Cash for $3,000.
C. Debit to an expense account for $60.
D. Credit to Cash for $2,940.
78. Parkside Pool reports net sales of $625,000, gross profit of $275,000, and net income of
$15,000. The company's cost of goods sold is:
A. $335,000.
B. $350,000.
C. $340,000.
D. $325,000.
79. The following information is available:
Calculate the gross profit:

A. $0.
B. $1,500.
C. $450.
D. $900.
6-15
80. During the year 2010, the inventory of Debra's Gift Shop decreased by $50,000. If the
income statement for the year 2010 reported cost of goods sold of $350,000, purchases during
the year must have amounted to:
A. $400,000.
B. $310,000.
C. $300,000.
D. $350,000.
81. At the beginning of 2011, Midway Hardware has an inventory of $400,000. Because sales
growth was strong during 2011, the owner wants to increase inventory on hand to $450,000 at
December 31, 2011. If net sales for 2011 are expected to be $1,600,000, and the gross profit
rate is expected to be 35%, compute the cost of the merchandise the owner should expect to
purchase during 2011.
A. $1,490,000.
B. $1,040,000.
C. $1,090,000.
D. $1,600,000.
82. If cost of goods sold is $480,000 and the gross profit rate is 40%, what is the gross profit?
A. $320,000.
B. $288,000.
C. $480,000.
D. $1,200,000.
83. Sutton Supplies reports net sales of $3,750,000, net income of $375,000, and gross profit
of $900,000. The company's cost of goods sold is:
A. $1,700,000.
B. $1,900,000.
C. $3,375,000.
D. $2,850,000.
6-16
84. At the beginning of the year, Saratoga Dress Co. had an inventory of $300,000. During the
year, the company purchased merchandise costing $850,000. Net sales for the year totaled
$1,200,000, and the gross profit rate was 45%. The cost of goods sold and the ending
inventory, respectively, were:
A. $1,150,000 and $660,000.
B. $540,000 and $610,000.
C. $660,000 and $490,000.
D. $1,150,000 and $490,000.
85. At the beginning of 2010, England Dresses has an inventory of $140,000. However,
management wants to reduce the amount of inventory on hand to $80,000 at December 31. If
net sales for 2010 are forecast at $400,000 and the gross profit rate is expected to be 40%,
compute the cost of the merchandise which management should expect to purchase during
2010. (Hint: First compute the expected cost of goods sold.)
A. $240,000.
B. $180,000.
C. $320,000.
D. $220,000.
86. On July 1, the inventory of at Barnett Shoes was $60,000. Because of anticipated back-to-
school sales, the owner wants to have an inventory of $105,000 on hand at the beginning of
August. Net sales during July are expected to total $70,000, with a gross profit rate of 45%.
During July, the company should purchase merchandise costing:
A. $38,500.
B. $143,500.
C. $83,500.
D. $105,000.
Michael uses its periodic inventory system and the following information is available:
6-17
87. What is the cost of goods sold?

A. $9,800.
B. $33,600.
C. $32,200.
D. $43,400.
88. What is the gross profit?

A. $9,800
B. $33,600
C. $32,200
D. $43,400
89. If Bartner Furniture, Inc. purchased inventory at $1,200 list price and the terms were 3/10
n/30, what would be the value associated with the inventory if payment was made after 20
days?
A. $1,176.
B. $1,236.
C. $1,164.
D. $1,200.
90. If costs of goods sold is $560,000 and its gross profit rate is 20%, what is the gross profit?
A. $140,000.
B. $70,000.
C. $120,000.
D. $112,000.
Washington Warehouse is a small retail business that specializes in the sale of top-of-the-line
televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Co.
Thus far, Washington has recorded the following transactions involving the Flat TV:
Jan. 5 Purchased 8 Flat TVs at a unit cost of $1,400
Jan. 18 Purchased 5 additional Flat TVs at $1,400 each
Feb. 12 Sold 9 Flat TVs to the Duke Hotel for $15,300
6-18
91. Refer to the information above. If Washington uses a perpetual inventory system, the
journal entry to record the purchase on January 18th would include which of the following?
A. A debit to the Purchases account for $7,000.
B. A debit to the Cost of Goods Sold for $7,000.
C. A credit to Inventory for $7,000.
D. A debit to Inventory for $7,000.
92. Refer to the information above. The gross profit on the Flat TVs as of February 12th is:
A. $11,200.
B. $2,700.
C. $4,100.
D. $15,300.
journal entry to record the sale on February 12th would include all of the following except:
A. A debit to the Cost of Goods Sold for $15,300.
B. A credit to Sales Revenue for $18,200.
C. A credit to Purchases for $15,300.
D. A credit to Inventory for $15,300.
94. Refer to the information above. Washington maintains a subsidiary ledger account for
each type of TV carried in the store. An examination of the account for the Flat TV model at
the end of February would show:
A. 4 units on hand with a total value of $1,400.
B. 4 units on hand with a total value of $5,600.
C. 13 units on hand with a total value of $18,200.
D. The amount that Washington owes to Bass.
6-19
95. Beacon Food Stores purchased canned goods at an invoice price of $4,000 and terms of
2/10, n/30. Half of the goods had been mislabeled and were returned immediately to the
supplier. If Harvest Food pays the remaining amount of the invoice within the discount
period, the amount paid should be:
A. $1,920.
B. $1,960.
C. $3,920.
D. $4,000.
96. Berg Tooling reports net sales of $325,000, gross profit of $175,000, and net income of
A. $135,000.
B. $150,000.
C. $140,000.
D. $125,000.
97. VanRoy Supplies reports net sales of $1,750,000, net income of $175,000, and gross profit
A. $1,400,000.
B. $475,000.
C. $1,575,000.
D. $1,450,000.
World of Sound is a small retail business that specializes in the sale of top-of-the-line sound
systems. This year, the store has begun to carry the Surround Sound manufactured by Carp
Co. Thus far, World of Sound has recorded the following transactions involving the Surround
Sound
May 5 Purchased 18 units at a unit cost of $2,400
May 18 Purchased 15 additional units at $2,550 each
June 12 Sold 19 units to the Davies Theater
6-20
98. If World of Sound uses a perpetual inventory system, the journal entry to record the
purchase on May 18th would include which of the following?
99. If World of Sound uses a perpetual inventory system, the journal entry to record the sale
on February 12th would include which of the following?
B. A credit to the Cost of Goods Sold for $45,750.
D. A debit to Inventory for $45,750
Bremmer uses a periodic inventory system and the following information is available:

A. $96,800.
B. $133,600.
C. $132,200.
D. $230,400.

A. $96,800.
B. $133,600.
C. $132,200.
D. $230,400.
6-21
102. If Bounder Dog Supplies, Inc purchased inventory at $2,200 list price and the terms were
3/10 n/30, what would be the value associated with the inventory if payment was made within
10 days?
A. $2,268.
B. $2,334.
C. $2,200.
D. $2,134.
103. Pet Foods Plus purchased bagged dog food at an invoice price of $6,000 and terms of
2/10, n/30. Half of the bags had been damaged in shipment and delivery was refused. If Pet
Foods Plus pays the remaining amount of the invoice within the discount period, the amount
paid should be:
A. $2,940.
B. $3,000.
C. $5,880.
D. $6,000.
104. At the beginning of 2012, Wilson Stores has an inventory of $300,000. Because sales
A. $750,000.
B. $1,240,000.
C. $1,690,000.
D. $1,840,000.
105. If cost of goods sold is $360,000 and the gross profit rate is 40%, what is the gross
profit?
A. $240,000.
B. $360,000.
C. $600,000.
D. $900,000.
Essay Questions
6-22
106. Accounting terminology Listed below are nine technical accounting terms introduced in
this chapter:
Gross profit
Gross profit rate
General ledger
Cost of goods sold
Physical inventory
Subsidiary ledger
Perpetual inventory system
Periodic inventory system Inventory shrinkage
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided below each statement, indicate the accounting term described, or answer
"None" if the statement does not correctly describe any of the terms.
____ a. An approach to accounting for inventories and the cost of goods sold used primarily in
small businesses with manual accounting systems.
____ b. A reason why perpetual inventory records may not be entirely accurate.
____ c. The difference between the revenue earned by selling merchandise and the cost of
goods sold.
____ d. Gross profit divided by average total stockholders' equity.
____ e. An accounting procedure used in both perpetual and periodic inventory systems. In a
perpetual system, this procedure brings to light the amount of inventory shrinkage. In a
periodic system, it is the basis for computing the cost of goods sold.
____ f. An accounting record showing the individual items comprising the balance of a
general ledger account.
____ g. The accounting record in which transactions initially are recorded.
6-23
107. Effects of transactions upon the accounting equation Listed below are selected
transactions of Simon's, a retail store which uses a perpetual inventory system:
(a) Purchased merchandise on account.
(b) Made an entry to recognize the revenue from a sale of merchandise on account. (Ignore
the cost of goods sold.)
(c) Recognized the cost of goods sold relating to the sale in Transaction b.
(d) Collected in cash the account receivable from the customer in Transaction b.
(e) Following the taking of a physical inventory at year-end, made an adjusting entry to record
a normal amount of inventory shrinkage.
Indicate the effects of each of these transactions upon the elements of the company's financial
statements. Organize your answer in tabular form, using the column headings shown below.
(Notice that the cost of goods sold is shown separately from all other expenses.) Use the code
letters I for increase, D for decrease, and NE for no effect. The answer for Transaction a is
provided as an example.
6-24
108. Subsidiary ledgers Listed below are several merchandising transactions of Siegel's
Garden Center, a garden supply store.
(a) Purchased merchandise from Bayview Wholesale on account.
(b) Sold merchandise for cash.
(c) Sold merchandise on account to Dom's Landscaping Co.
(d) Paid the account payable to Bayview Wholesale.
(e) Collected the account receivable from Dom's Landscaping Co.
Among the accounting records maintained by Siegel's are subsidiary ledgers for inventory,
accounts receivable, and accounts payable.
For each of the five transactions, you are to indicate any subsidiary ledger (or ledgers) to
which the transaction would be posted. Use the code:
Inv = Inventory subsidiary ledger
AR = Accounts receivable subsidiary ledger
AP = Accounts payable subsidiary ledger
Also indicate whether each posting causes the balance in the subsidiary ledger account to
increase or decrease. Organize your answer in tabular form as illustrated below. The answer
for transaction a is provided as an example.
6-25
109. Perpetual inventory system: basic entries Renato Company uses a perpetual inventory
system. A partial chart of accounts is shown below, followed by a series of merchandising
transactions. Indicate the accounts that should be debited and credited in recording each
transaction. (Ignore sales taxes.)
6-26
110. Perpetual inventory system: transactions and closing entries Danny's Wholesale
Company uses a perpetual inventory system. A partial chart of accounts is shown below,
followed by a series of merchandising transactions. Indicate the accounts that should be
debited and credited in recording each transaction. (Ignore sales taxes.)
6-27
111. Periodic inventory system Soundview Centre uses a periodic inventory system. At the
end of 2010, the accounting records include the following information:
Compute the following for 2010:
112. Periodic inventory system Armstrong Creation uses a periodic inventory system. During
the current year, the company purchased merchandise at a cost of $245,000. You are to
compute the cost of goods sold under each of the following alternative assumptions:
6-28
113. Gross profit The table below contains information from a recent annual report of Molloy,
Inc. (Dollar amounts are stated in millions.) Fill in the missing amounts.
6-29
114. Gross profit rates a practical application

Note to instructor: The following exercise requires students to use gross profit rates in a
manner not specifically illustrated in the chapter. We view this as an exercise in critical
thinking and, as such, it is more challenging than the typical exercise. Part d requires an
expository answer. Some instructors may choose to omit part d.
Your store sells computers and software. The average computer sells for $1,350, but the
customer buying a computer also buys an average of $750 in software. You earn only 10%
gross profit rate on sales of computers, but you make a 40% gross profit rate on software. You
currently are selling 150 computers per month.
(a) What is the total amount of your monthly gross profit? $________________
(b) To increase sales, you are thinking about selling computers at cost ($1,215.) This would be
the "cheapest price in town," and should attract more customers. You expect each customer
who buys a computer to also buy $750 worth of software. Under these assumptions, how
many computers must you sell each month in order to earn the same amount of gross profit as
you are earning now?
(c) Assume that as a result of reducing the sales price of computers to cost ($1,215), you are
able to sell 250 computers each month, and that each customer now buys $850 worth of
software. What will be the total amount of your monthly gross profit?
(d) Assume that you achieve the results specified in part c (250 sales transactions per month,
including an average of $850 in software). Would you consider the policy of selling
computers at cost successful or unsuccessful? Explain specifically why this strategy is
working out favorably or unfavorably.
6-30
115. Net sales and gross profit

Mayflower Supply House had gross sales revenue of $1,700,000, cost of goods sold of
$950,000, sales returns and allowances of $52,500, and allowed sales discounts of $30,000.
Compute for the year:
6-31
116. Journal entries for merchandising transactions Shown below is a partial chart of accounts
for Main Street Markets, followed by a series of merchandising transactions. The company
uses a perpetual inventory system, records purchases at net cost, and records sales at the full
invoice price. Sales taxes are collected on all sales, and the sales tax liability is recorded
immediately. Freight charges on inbound shipments are recorded in the Transportation-in
account.
Indicate the accounts that should be credited in recording each transaction by placing the
appropriate account number(s) in the space provided.
6-32
117. Inventory systems

Briefly distinguish between a perpetual inventory system and a periodic inventory system.

Indicate whether you would expect each of the following businesses to maintain a perpetual
or a periodic inventory system. Explain the reasoning behind your answers:
(a) A jewelry store.
(b) A roadside vegetable stand.

Bookmarks, Inc. sells used books at its store in the resort community of Lake Bryn Mawr. The
owner maintains a large inventory of used books purchased from estate sales, flea markets,
and customers. During the tourist seasons of summer and winter, the store is exceptionally
busy with customers. Each customer usually makes small purchases ranging in amount from
one to twenty dollars. What type of inventory system would you recommend to the owner of
Bookmarks, Inc.? Explain the reasoning behind your advice.
6-33
120. Subsidiary ledgers Explain the nature of subsidiary ledgers, and give two specific
examples. For each of these examples, explain (1) the unit of organization within this ledger,
and (2) the usefulness of this ledger in business operations.
121. Using gross profit rates Explain how the gross profit rate for a particular product is
determined. How would you expect the manager of a large department store to use these gross
profit rates in deciding which products to feature in the store's window displays and in
determining the location of various types of merchandise within the store? Explain.
122. A customer purchased merchandise for $450 which cost the seller $200. The customer
was dissatisfied with some of the goods and thus returned $100 worth and received a cash
refund.
(a) What journal entries should the seller make when the merchandise is sold and at the time
of the return? Assume that the seller uses a perpetual inventory system.
(b) If the seller uses a periodic inventory system, what entries would be made?
6-34
123. Prepare journals entries for the following, assuming the company uses a perpetual
inventory method and records purchases at their net amounts.
124. Which of the following businesses is most likely to use a periodic inventory system?
A. An aircraft manufacturer.
B. A supermarket that is part of a national chain.
C. An independently owned art gallery with a manual accounting system.
D. A beer bar.
125. A periodic inventory system eliminates the need for:

A. Taking an annual physical inventory.
B. Recording the revenue from sales transactions.
C. Recording the cost of merchandise sold as sales occur.
D. None of the above.
6-35
126. If management wants to know the cost and quantity of merchandise on hand at all times,
the business will probably:
A. Use a periodic inventory system.
B. Maintain an inventory subsidiary ledger.
C. Take a complete physical inventory each day.
D. Debit all purchases of merchandise directly to the Cost of Goods Sold account.
127. In a perpetual inventory system, the entry to record the cost of goods sold always
includes an entry of equal amount to the:
A. Inventory account.
B. Sales account.
C. Purchases account.
128. Prior to taking a physical inventory at year-end, the perpetual inventory records of
Athena Designs showed an inventory of $26,000, sales of $358,000, and a cost of goods sold
of $215,000. The year-end physical inventory indicated merchandise on hand costing
$24,000. The company's gross profit for the year was:
A. $334,000.
B. $145,000.
C. $141,000.
D. Some other amount.
At the end of last year, Helen's, Inc. had merchandise costing $115,000 in inventory. During
January of the current year, the company purchased merchandise costing $35,000, and sold
merchandise which it had purchased at a total cost of $55,000.
Based upon the above information, place the best answer in the space provided. In questions 1
through 3, assume that Helen's uses a perpetual inventory system.
129. The total debited to the Inventory account during January was:
A. $0.
B. $35,000.
C. $55,000.
D. Some other answer.
6-36
130. The balance in the Inventory account at January 31 was:

A. $35,000.
B. $205,000.
C. $95,000.
131. The amount of costs transferred from the Inventory account to the Cost of Goods Sold
account during January was:
A. $0.
B. $35,000.
C. $55,000.
Assume that Jerome's, Inc. uses a periodic inventory system and takes a physical inventory
only at year-end.
A. $0.
B. $35,000.
C. $55,000.

A. $0.
B. $105,000.
C. $115,000.
6-37
A. $0.
B. $35,000.
C. $55,000.
Essay Questions
135. At the end of last year, Baron's Bazaar had merchandise costing $381,000 in inventory.
During January of the current year, the company purchased merchandise costing $133,500,
and sold merchandise which it had purchased at a total cost of $109,300.
a. Assume that Baron's Bazaar uses a perpetual inventory system.
(1) The total amount debited to the Inventory account during January was:
$________________
(2) The balance in the Inventory account at January 31 was:
$________________
(3) The amount of costs transferred from the Inventory account to the Cost of Goods Sold
$________________
b. Assume that Baron's Bazaar uses a periodic inventory system and takes a physical
inventory only at year-end (December 31). (Note: $0 may be an appropriate answer to one or
more of the following questions.)
$________________
$________________
$________________
6-38
136. Phillips Co. is an office supply store. The company uses a perpetual inventory system,
records purchases at net cost, and records sales revenue at full invoice price.
Record the following transactions in the company's general journal. To conserve space, you
may omit the written explanations which normally should accompany the entries.
July 1 Purchased four Lorac copying machines on account from Lorac Corp. Total invoice
price was $2,500 per machine ($10,000 total); terms of 2/10, n/30. These machines are
intended for resale.
3 Found one of the Lorac copiers to be defective and returned it to Lorac, thus reducing the
amount owed.
9 Sold one of the Lorac copiers to Morris Realty. The sales price was $3,500, terms 5/10,
n/60.
10 Paid the remaining amount owned to Lorac Corp., less the allowable discount.
19 Received full payment from Morris, less the allowable discount.
6-39
137. Mark and Amanda Carter own an appliance store and a restaurant. The appliance store
sells merchandise on a 12-month installment plan; the restaurant sells only for cash. (More
than one of the following answers may be correct.)
A. The appliance store has a longer operating cycle than the restaurant.
B. The appliance store probably uses a perpetual inventory system, whereas the restaurant
probably uses a periodic system.
C. Both businesses require subsidiary ledgers for accounts receivable and inventory.
D. Both businesses probably have subsidiary ledgers for accounts payable.
138. Which of the following statements about merchandising activities is true? (More than
one answer may be correct)
A. As inventory is purchased, the Inventory Expense account is debited and Cash (or
Accounts Payable) is credited.
B. Inventory is recorded as an asset when it is first purchased.
C. As inventory is sold, its cost is transferred from the balance sheet to the income statement.
D. As inventory is sold, its cost is transferred from the income statement to the balance sheet.
139. Marietta Corporation uses a perpetual inventory system. All of its sales are made on
account. The company sells merchandise costing $3,000 at a sales price of $4,300. In
recording this transaction, Marietta will make all of the following entries except:
A. Credit Sales, $4,300.
B. Credit Inventory, $3,000.
C. Debit Cost of Goods Sold, $3,000.
D. Debit one or more accounts in the inventory subsidiary ledger for amounts totaling $3,000.
6-40
140. Fashion House uses a perpetual inventory system. At the beginning of the year,
inventory amounted to $50,000. During the year, the company purchased merchandise for
$230,000, and sold merchandise costing $245,000. A physical inventory taken at year-end
indicated shrinkage losses of $4,000. Prior to recording these shrinkage losses, the year-end
balance in the company's Inventory account was:
A. $31,000.
B. $35,000.
C. $50,000.
141. Best Hardware uses a periodic inventory system. Its inventory was $38,000 at the
beginning of the year, and $40,000 at the end. During the year, Best made purchases of
merchandise totaling $107,000. Identify all of the correct answers:
A. To use this system, Best must take a complete physical inventory twice each year.
B. Prior to making adjusting and closing entries at year-end, the balance in Best's Inventory
account is $38,000.
C. The cost of goods sold for the year is $109,000.
D. As sales transactions occur, Best makes no entries to update its inventory records or record
the cost of goods sold.
142. The two basic approaches to accounting for inventory and the cost of goods sold are the
perpetual inventory system and the periodic inventory system. (More than one of the
following statements may be correct.)
A. Most large merchandising companies and manufacturing businesses use periodic inventory
systems.
B. As a practical matter, a grocery store or a large department store could not maintain a
perpetual inventory system without the use of point-of-sale terminals.
C. In a periodic inventory system the cost of goods sold cannot be determined until a
complete physical inventory is taken.
D. In a perpetual inventory system, the Cost of Goods Sold account is debited promptly for
the cost of merchandise sold.
6-41
143. Big Brother, a retail store, purchased 100 television sets from Krueger Electronics on
account at a cost of $200 each. Kruger offers credit terms of 2/10, n/30; Big Brother uses a
perpetual inventory system and records purchases at net cost. Big Brother determines that 10
of these television sets are defective and returns them to Krueger for full credit. In recording
this return, Big Brother will:
A. Debit Sales Returns and Allowances, $1,960.
B. Debit Accounts Payable, $1,960.
D. Credit Inventory, $2,000.
144. Two of the lawn mowers sold by Garden Products Co. are the Lawn Master and the Mark
5. Lawn Masters sell for $250 apiece, which results in a 35% profit margin. Each Mark 5
costs Garden Products $300 and sells for $400. Indicate all correct answers.
A. The dollar amount of gross profit is greater on the sale of a Mark 5 than a LawnMaster.
B. The gross profit margin is higher on Mark 5s than on LawnMasters.
C. Garden profits relatively more by selling one Mark 5 than one LawnMaster.
D. Garden profits more by selling $2,000 worth of Mark 5s than $2,000 worth of
LawnMasters.
6-42
Chapter 06 Merchandising Activities Answer Key
True / False Questions
1. Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the
balance sheet.
FALSE
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 06-01 Describe the operating cycle of a merchandising company.
Topic: Merchandising Companies
2. The operating cycle of a merchandising company consists of (1) purchases of merchandise;

(2) sales of the merchandise; and (3) collection of accounts receivable.
TRUE

AICPA BB: Resource Management
Bloom's: Remember
Difficulty: Easy
3. Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage,

theft, and sales of inventory.
FALSE

Bloom's: Remember
Difficulty: Easy
Learning Objective: 06-03 Account for purchases and sales of merchandise in a perpetual inventory system.
Topic: Perpetual Inventory Systems
6-43
4. In a perpetual inventory system, when merchandise is purchased, it is debited to an account

called Purchases.
FALSE

Bloom's: Remember
Difficulty: Easy
5. In a periodic inventory system, the Cost of Goods Sold account may be created during the
closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the
Purchases account.
TRUE

Bloom's: Understand
Difficulty: Medium
Learning Objective: 06-04 Explain how a periodic inventory system operates.
Topic: Periodic Inventory Systems
6. Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income
statement.
FALSE

Bloom's: Remember
Difficulty: Medium
Learning Objective: 06-06 Account for additional merchandising transactions related to purchases and sales.
Topic: Transactions Relating to Purchases
6-44
7. Net Sales is computed as total sales revenue less sales returns and allowances less sales
discounts.
TRUE

Bloom's: Remember
Difficulty: Easy
Topic: Transactions Relating to Sales
8. The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be
closed by crediting these accounts and debiting Income Summary for each account.
TRUE

Bloom's: Understand
Difficulty: Medium
9. Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross
sales.
FALSE

AICPA BB: Industry
Bloom's: Remember
Difficulty: Easy
Learning Objective: 06-08 Measure the performance of a merchandising business.
Topic: Financial Analysis and Decision Making
6-45
10. The accounting cycle of a merchandising business is the length of time covered by the
company's income statement.
TRUE

Bloom's: Remember
Difficulty: Easy
11. Today, most large merchandising companies use a perpetual inventory system.
TRUE

Bloom's: Remember
Difficulty: Easy
Learning Objective: 06-05 Discuss the factors to be considered in selecting an inventory system.
12. Inventories are assets that a company holds for sale in the ordinary course of business.
TRUE

Bloom's: Remember
Difficulty: Easy
Learning Objective: 06-02 Understand the components of a merchandising company's income statement.
6-46
13. In preparing monthly bills to be sent to individual credit customers, the billing department
will use the accounts payable subsidiary ledger, rather than the general ledger.
FALSE

Bloom's: Understand
Difficulty: Easy
Learning Objective: 06-07 Define special journals and explain their usefulness.
Topic: Modifying an Accounting System
14. In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept
FALSE

Bloom's: Understand
Difficulty: Easy
15. A perpetual inventory system requires the capability of recording the cost of the goods
sold in individual sales transactions.
TRUE

Bloom's: Understand
Difficulty: Easy
6-47
16. Wholesalers buy from retailers and sell to the general public.
FALSE

Bloom's: Remember
Difficulty: Easy
17. Under the periodic inventory system, no effort is made to keep up-to-date records of either
Inventory or Cost of Goods Sold as transactions occur.
TRUE

Bloom's: Understand
Difficulty: Medium
18. The manager of National Software wants to know how many Microsoft Excel programs
the store sold in June. This information is contained in the Inventory controlling account.
FALSE

Bloom's: Understand
Difficulty: Medium
Learning Objective: 06-07 Define special journals and explain their usefulness.
Topic: Modifying an Accounting System
6-48
19. In a retail department store with an efficient perpetual inventory system, the quantities of
goods actually on hand are probably somewhat more than the quantities indicated in the
accounting records.
FALSE
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
FALSE

Bloom's: Remember
Difficulty: Easy
21. In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept
TRUE

Bloom's: Understand
Difficulty: Easy
6-49
22. In a periodic inventory system, the ending inventory can be determined from the
accounting records, and a physical count of the merchandise on hand will confirm the
amount.
FALSE

Bloom's: Understand
Difficulty: Medium
23. In a periodic inventory system, the cost of goods sold is determined by the following end-
of-period computation: Beginning Inventory + Purchases - Ending inventory = Cost of Goods
Sold.
TRUE

Bloom's: Understand
Difficulty: Medium
24. Under the perpetual inventory system, two entries are required when goods are sold.
TRUE

Bloom's: Understand
Difficulty: Medium
6-50
25. If ending inventory and cost of goods sold are added together, they should equal gross
profit.
FALSE

Bloom's: Remember
Difficulty: Easy
26. Instead of paying for merchandise purchased on account, Olympic Corp. returned this
merchandise to the supplier. Olympic should record this transaction by debiting Accounts
Payable and crediting Sales Returns and Allowances.
FALSE

Bloom's: Understand
Difficulty: Medium
FALSE

Bloom's: Remember
Difficulty: Easy
6-51
28. A large company with many different kinds of low-cost items would tend to use a
perpetual inventory system.
TRUE
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
29. The average gross profit margin is a measure of relative profitability.

TRUE

Bloom's: Remember
Difficulty: Easy
30. If ending inventory and cost of goods sold are added together, they should equal cost of
goods available for sale.
TRUE

Bloom's: Remember
Difficulty: Easy
6-52
31. Operating income is:

A. A measure of profitability after deducting cost of sales from net sales.
B. A measure of profitability after deducting cost of sales and all expenses incurred in
operating the business from net sales.
C. A measure of liquidity after deducting cost of sales from net sales.
D. The equivalent of net sales.

Bloom's: Remember
Difficulty: Easy
32. Sales discounts and allowances:

A. When properly recorded will reduce net profit.
B. When properly recorded will increase net profit.
C. Will not affect net profit.
D. Are always immaterial and need not be recorded.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
33. Which account listed below is classified as a contra-revenue account?

A. Cost of Goods Sold.
B. Gross profit.
C. Sales Discounts.
D. Purchases.

Bloom's: Remember
Difficulty: Medium
6-53
34. The Cost of Goods Sold account is closed by:

A. Debiting Cost of Goods Sold and crediting Income Summary.
B. Debiting Cost of Goods Sold and crediting Retained Earnings.
C. Debiting Income Summary and crediting Cost of Goods Sold.
D. Debiting Retained Earnings and crediting Cost of Goods Sold.
AACSB: Analytic
Bloom's: Understand
Difficulty: Easy
35. Merchandising companies that are small and do not use a perpetual inventory system may
elect to use:
A. A physical inventory system.
B. A periodic inventory system.
C. An inventory shrinkage method.
D. An inventory subsidiary ledger system.

Bloom's: Understand
Difficulty: Medium
36. Which of the following would not tend to make a manufacturer choose a perpetual
inventory system?
A. Management wants information about quantities of specific products.
B. A low volume of sales transactions and a computerized accounting system.
C. A high volume of sales transactions and a manual accounting system.
D. Items in inventory with high per unit costs.

Bloom's: Understand
Difficulty: Medium
6-54
37. Which of the following should not be classified as inventory in the balance sheet of a
large automobile dealership?
A. Pickup trucks offered for sale.
B. Used cars taken in trade and offered for sale on the company's used-car lot.
C. Spark plugs, oil filters, and other parts which are intended for use by the service
department in repairing and servicing customers' cars.
D. "Company cars" provided to specific company executives for their personal use.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
38. Which of the following factors would suggest the use of a perpetual inventory system?
A. A small company.
B. A high volume of many different, low-cost items.
C. A desire to minimize record-keeping requirements.
D. Only annual reporting is required.

Bloom's: Understand
Difficulty: Medium
39. Which of the following businesses is likely to have the shortest operating cycle?
A. A food store.
B. A department store.
C. An art store.
D. A car store.

Bloom's: Understand
Difficulty: Medium
6-55
40. Which of the following companies would be more likely to use a periodic inventory
system?
A. IBM.
B. 1st Bank of New York.
C. Sears.
D. A newspaper stand.

Bloom's: Understand
Difficulty: Medium
41. Sales revenue is recognized in the period in which:

A. Merchandise is delivered to the customer.
B. The customer orders the merchandise.
C. Cash payment is received by the seller.
D. Purchases are made to replace the merchandise sold.

Bloom's: Understand
Difficulty: Easy
42. Which of the following companies would be more likely to use a perpetual inventory
system?
A. Corner deli.
B. Home Depot.
C. James Dean, CPA.
D. A manufacturer of custom sailboats.

Bloom's: Understand
Difficulty: Medium
6-56
43. Which of the following appears in the income statement of a merchandising business, but
not in the income statement of a business that renders only services?
A. Interest revenue.
B. Gross profit.
C. Advertising expense.
D. Income tax expense.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
44. Which of the following factors would suggest the use of a periodic inventory system?
A. A small company.
B. A high volume of sales and a manual accounting system.
C. Neither a small company or a high volume of sales and a manual accounting system.
D. Both a small company and a high volume of sales and a manual accounting system.

Bloom's: Understand
Difficulty: Medium
45. Gross profit is the difference between:

A. Net sales and the cost of goods sold.
B. The cost of merchandise purchased and the cost of merchandise sold.
C. Net sales and net income.
D. Net sales and all expenses.

Bloom's: Remember
Difficulty: Easy
6-57
46. The credit term 2/10, n/30 means:

A. That after 10 days 2% interest is charged.
B. That there is a 10% discount if payment is received within 30 days.
C. That there is a 2% discount if payment is received within 10 days, otherwise, full payment
is due within 30 days.
D. There is a 10% discount if paid immediately and 2% if paid within 30 days.

Bloom's: Remember
Difficulty: Medium
47. The basic purpose of a subsidiary ledger is to:

A. Provide a chronological record of all business transactions.
B. Provide details about the individual items comprising the balance of a general ledger
account.
C. Enable accountants to prepare financial statements.
D. Provide persons outside of the organization with detailed information about the company's
operations.

Bloom's: Understand
Difficulty: Easy
6-58
48. Under the perpetual inventory system which journal entry would indicate a purchase of
merchandise?
A. Debit, Inventory and credit, Cash.
B. Debit, Purchases and credit, Cash.
C. Debit, Costs of Goods Sold and credit, Inventory.
D. Debit, Inventory and credit, Cost of Goods Sold.

Bloom's: Understand
Difficulty: Easy
49. The purchasing agent of Superb Service Co. wants to know the dollar amount of inventory
purchased on account during the year from a particular supplier. This information can be
found most easily in Superb Service's:
A. Inventory subsidiary ledger.
B. Accounts payable controlling account.
C. Inventory controlling account.
D. Accounts payable subsidiary ledger.

Bloom's: Understand
Difficulty: Medium
6-59
50. Which of the following credit terms is the most advantageous to the purchaser of
merchandise?
A. 1/10, n/30.
B. 5/10, n/60.
C. 2/10, n/30.
D. 5/10, n/20.

Bloom's: Understand
Difficulty: Medium
51. Cumberland, Inc. has applied to its bank for a loan. The bank asks Cumberland's
controller about the total amount of the company's accounts receivable. Assuming that all
accounting records are up-to-date, the controller can best answer this question by referring to:
A. The Income Statement.
B. The Accounts Receivable controlling account.
C. The Accounts Receivable subsidiary ledger.
D. Last year's Balance Sheet.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
6-60
52. In a perpetual inventory system:

A. Merchandising transactions are recorded as they occur.
B. No effort is made to record the Cost of Goods Sold until year-end.
C. Entries are made in the Cost of Goods Sold account whenever merchandise is purchased or
sold.
D. The need for ever taking physical inventory is eliminated.

Bloom's: Understand
Difficulty: Medium
53. Net sales is calculated by:

A. Subtracting cost of sales from sales.
B. Subtracting sales returns and sales discounts from sales.
C. Subtracting sales returns, cost of sales, and sales discounts from sales.
D. Subtracting gross profit from sales.

Bloom's: Remember
Difficulty: Easy
54. In a perpetual inventory system, two entries usually are made to record each sales
transaction. The purposes of these entries are best described as follows:
A. One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
B. One entry records the purchase of the merchandise, and the other records the sale.
C. One entry records the cost of goods sold, and the other reduces the balance in the Inventory
account.
D. One entry updates the general ledger, and the other updates the subsidiary ledgers.

Bloom's: Understand
Difficulty: Medium
6-61
55. In a periodic inventory system, which of the following accounts may be closed by debiting
Cost of Goods Sold?
A. Sales, Inventory (beginning), and Gross Profit.
B. Inventory (beginning) and Purchases.
C. Purchases and Inventory (ending).
D. Sales, Inventory (beginning), and Cost of Goods Available for Sale.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
56. In comparing a perpetual inventory system with a periodic inventory system, which of the
following statements is not correct?
A. Most large companies use perpetual inventory systems.
B. A periodic system does not include an inventory subsidiary ledger.
C. The perpetual method is easier to apply in a manual accounting system.
D. Regardless of the system in use, most businesses take a physical inventory at least once a
year.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
6-62
57. Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance
in the Inventory controlling account is $1,200,000. Assuming that the inventory records have
been maintained properly, a year-end physical inventory:
A. Is unnecessary.
B. Is needed to establish the ending inventory, as the $1,200,000 balance in the Inventory
controlling account represents the beginning inventory.
C. Probably will indicate more than $1,200,000 in merchandise on hand.
D. Probably will indicate less than $1,200,000 in merchandise on hand.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
58. Jayson Products uses a perpetual inventory system. At year-end, the Inventory account
had a balance of $280,000, but a complete year-end physical inventory indicated goods on
hand costing only $273,000. Jayson should:
A. Reduce its cost of goods sold by $7,000.
B. Record a $7,000 current liability.
C. Reduce the balance in its Inventory controlling account and inventory subsidiary ledger by
$7,000.
D. Reduce the balance in the Inventory controlling account and record a current liability, both
in the amount of $7,000.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-63
59. The cost of delivering merchandise to the customer is:

A. Part of cost of goods sold.
B. Used in the calculation of net sales.
C. An operating expense.
D. A reduction of gross profit.

Bloom's: Understand
Difficulty: Medium
60. In a periodic inventory system, the cost of goods sold is:

A. Recorded as sales transactions occur.
B. Determined by a computation which is performed at year-end, after the taking of a
complete physical inventory.
C. Equal to the beginning inventory, plus purchases made during the period, less sales revenue
for the period.
D. Determined by subtracting the balance in the Gross Profit account from the amount of net
sales.

Bloom's: Understand
Difficulty: Medium
6-64
61. In a periodic inventory system, the formula used in computing the cost of goods sold may
be summarized as follows:
A. Beginning inventory + purchases - ending inventory.
B. Beginning inventory + purchases - net sales.
C. Ending inventory + purchases - net sales.
D. Balance in the Cost of Goods Sold account, less the balance in the Inventory Shrinkage
account.

Bloom's: Understand
Difficulty: Easy
62. Periodic inventory systems are used primarily by:

A. Small businesses with manual accounting systems.
B. Large manufacturing companies.
C. Small businesses that sell a low volume of high-priced items.
D. Companies that sell a high volume of low-priced items and record sales transactions on
point-of-sale terminals.

Bloom's: Understand
Difficulty: Medium
63. Inventory shrinkage is not caused by:

A. Shoplifting.
B. Breakage.
C. Price reductions by competitors.
D. Spoilage.

Bloom's: Understand
Difficulty: Easy
6-65
64. Which of the following statements about a periodic inventory system is not correct?
A. These systems are used primarily by small businesses with manual accounting systems.
B. The system does not include an up-to-date inventory ledger.
C. The balance in the Inventory account remains unchanged until the end of the period.
D. The Cost of Goods Sold account is updated as sales transactions occur.

Bloom's: Understand
Difficulty: Medium
65. The cost of the transportation of inventory purchased:

A. Are expensed in the current period.
B. Increases income.
C. Becomes part of the cost of inventory.
D. Reduces the sales price.

Bloom's: Understand
Difficulty: Easy
66. A company's gross profit rate is computed by dividing:

A. Net sales by gross profit.
B. Cost of goods sold by gross profit.
C. Gross profit by the cost of goods sold.
D. Gross profit by net sales.

Bloom's: Remember
Difficulty: Easy
6-66
67. Regal Artworks Co. records purchases net of all available purchase discounts. If the
company makes payment after the discount has expired, the entry to record the payment
should include a:
A. Debit to Purchase Discounts Lost.
B. Credit to Purchase Discounts Lost.
C. Debit to Sales Discounts.
D. Credit to Sales Discounts.

Bloom's: Understand
Difficulty: Medium
68. To arrive at net sales:

A. Add sales discounts to sales.
B. Subtract the cost of goods sold from the sales price.
C. Subtract sales returns and sales discounts from sales.
D. Subtract accounts receivable from sales.

Bloom's: Understand
Difficulty: Easy
6-67
69. As a retailer, which of the following percentages is the least attractive to you?
A. Gross profit of 30%.
B. Cost of goods sold as a percentage of net sales equal to 70%.
C. Gross margin of 30%.
D. Sales markup of 30% over cost.
A sales markup of 30% over cost would be the same as a gross profit of 30%/130% = 23%.

Bloom's: Analyze
Difficulty: Hard
70. Bernice Beverages is not satisfied with the quality of merchandise purchased from Reade
Supplies. If American Supplies agrees to settle this matter by granting Bernice Beverages a
sales allowance, Bernice Beverages will:
A. Return the entire shipment to Reade Supplies and receive a full refund.
B. Return only that portion of the merchandise that it is unable to sell within the discount
period.
C. Keep the merchandise, but pay a reduced purchase price.
D. Keep the merchandise and sell it at a reduced sales price.

Bloom's: Apply
Difficulty: Medium
6-68
71. The Sales Returns and Allowances account is debited when:

A. Merchandise is returned to a supplier.
B. Merchandise is returned by a customer.
C. Payment is made to a supplier within the discount period.
D. An account receivable is collected within the discount period.

Bloom's: Understand
Difficulty: Easy
72. If sales discounts are shown as a separate item in financial statements, they should be
shown as a (n):
A. Deduction from accounts receivable.
B. Deduction from gross sales revenue.
C. Operating expense.
D. Current liability.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Easy
73. All of the following accounts normally have debit balances except:
A. Transportation-in.
B. Cost of Goods Sold.
C. Sales Returns & Allowances.
D. Purchase Returns & Allowances.

Bloom's: Understand
Difficulty: Easy
6-69
74. The gross profit margin:

A. Is the dollar amount of gross profit expressed as a percentage of cost of sales.
B. May indicate popular products and successful marketing strategies.
C. Must be computed for the business as a whole rather than for specific sales departments.
D. Is equal to cost of goods sold plus gross operating expenses.
AACSB: Analytic
Bloom's: Remember
Difficulty: Medium
75. The basic purpose of offering customers cash discounts such as 2/10, n/30 is to:
A. Increase sales.
B. Reduce net sales.
C. Speed up the collection of accounts receivable.
D. Focus management's attention upon customers that fail to take advantage of all available
cash discounts.

Bloom's: Understand
Difficulty: Medium
76. When making sales, the sales taxes received are:

A. Revenue.
B. A liability.
C. An expense if incurred.
D. A reduction in inventory value.

Bloom's: Understand
Difficulty: Medium
6-70
77. Emerald Co. uses a perpetual inventory system and records purchases of merchandise at
net cost. The company recently purchased 200 compact discs at an invoice price of $6,000
and terms of 2/10, n/30. Half of these discs had been mislabeled and were returned
immediately to the supplier. The journal entry to record payment of this invoice after the
discount period has expired will include a:
A. Debit to Inventory for $3,000.
B. Credit to Cash for $3,000.
C. Debit to an expense account for $60.
D. Credit to Cash for $2,940.
(1/2 x $6000) = $3,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
78. Parkside Pool reports net sales of $625,000, gross profit of $275,000, and net income of
A. $335,000.
B. $350,000.
C. $340,000.
D. $325,000.
$625,000 - $275,000 = $350,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
6-71
79. The following information is available:
Calculate the gross profit:

A. $0.
B. $1,500.
C. $450.
D. $900.
$2,850 - $2,400 = $450
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
80. During the year 2010, the inventory of Debra's Gift Shop decreased by $50,000. If the
income statement for the year 2010 reported cost of goods sold of $350,000, purchases during
the year must have amounted to:
A. $400,000.
B. $310,000.
C. $300,000.
D. $350,000.
Beginning inventory + Purchases - Ending inventory = Cost of Goods Sold

Purchases = Cost of goods sold - (Beginning inventory - Ending inventory)
Purchases = $350,000 - 50,000 = $300,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-72
81. At the beginning of 2011, Midway Hardware has an inventory of $400,000. Because sales
A. $1,490,000.
B. $1,040,000.
C. $1,090,000.
D. $1,600,000.
$1,600,000 x (1 - .35) = $1,040,000 Cost of Goods Sold

$1,040,000 + $450,000 EI - $400,000 BI = $1,090,000 Purchases
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
82. If cost of goods sold is $480,000 and the gross profit rate is 40%, what is the gross profit?
A. $320,000.
B. $288,000.
C. $480,000.
D. $1,200,000.
$480,000/.60 = $800,000 (Sales); $800,000 x .4 = $320,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-73
83. Sutton Supplies reports net sales of $3,750,000, net income of $375,000, and gross profit
A. $1,700,000.
B. $1,900,000.
C. $3,375,000.
D. $2,850,000.
$3,750,000 - $900,000 = $2,850,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
84. At the beginning of the year, Saratoga Dress Co. had an inventory of $300,000. During the
year, the company purchased merchandise costing $850,000. Net sales for the year totaled
$1,200,000, and the gross profit rate was 45%. The cost of goods sold and the ending
inventory, respectively, were:
A. $1,150,000 and $660,000.
B. $540,000 and $610,000.
C. $660,000 and $490,000.
D. $1,150,000 and $490,000.
Cost of Goods Sold = (100% - 45%) = 55% x $1,200,000 = $660,000

Goods Available = $300,000 + $850,000 = $1,150,000
Ending Inventory = $1,150,000 - $660,000 = $490,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-74
85. At the beginning of 2010, England Dresses has an inventory of $140,000. However,
management wants to reduce the amount of inventory on hand to $80,000 at December 31. If
net sales for 2010 are forecast at $400,000 and the gross profit rate is expected to be 40%,
compute the cost of the merchandise which management should expect to purchase during
2010. (Hint: First compute the expected cost of goods sold.)
A. $240,000.
B. $180,000.
C. $320,000.
D. $220,000.
Cost of goods sold = 60% x $400,000 = $240,000

Goods available = $80,000 + $240,000 = $320,000
Purchases = $320,000 - $140,000 = $180,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
86. On July 1, the inventory of at Barnett Shoes was $60,000. Because of anticipated back-to-
school sales, the owner wants to have an inventory of $105,000 on hand at the beginning of
August. Net sales during July are expected to total $70,000, with a gross profit rate of 45%.
During July, the company should purchase merchandise costing:
A. $38,500.
B. $143,500.
C. $83,500.
D. $105,000.
Cost of goods sold = 55% x $70,000 = $38,500

Goods available = $38,500 + $105,000 = $143,500
Purchases = $143,500 - $60,000 = $83,500
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-75
Michael uses its periodic inventory system and the following information is available:

A. $9,800.
B. $33,600.
C. $32,200.
D. $43,400.
Beginning Inventory ($11,200) + Purchases ($32,200) = Goods Available ($43,400) - Ending

Inventory ($9,800) = Cost of Goods Sold ($33,600)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium

A. $9,800
B. $33,600
C. $32,200
D. $43,400
Sales ($43,400) - Cost of Goods Sold ($33,600) = $9,800
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-76
89. If Bartner Furniture, Inc. purchased inventory at $1,200 list price and the terms were 3/10
n/30, what would be the value associated with the inventory if payment was made after 20
days?
A. $1,176.
B. $1,236.
C. $1,164.
D. $1,200.
$1,200 x 100% = $1,200
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
90. If costs of goods sold is $560,000 and its gross profit rate is 20%, what is the gross profit?
A. $140,000.
B. $70,000.
C. $120,000.
D. $112,000.
Cost of goods sold = 80%

Sales = $560,000/.8 = $700,000
Gross Profit = .2 x $700,000 = $140,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-77
Washington Warehouse is a small retail business that specializes in the sale of top-of-the-line
televisions. This year, the store has begun to carry the Flat TV manufactured by Bass Co.
Thus far, Washington has recorded the following transactions involving the Flat TV:
Jan. 5 Purchased 8 Flat TVs at a unit cost of $1,400
Jan. 18 Purchased 5 additional Flat TVs at $1,400 each
Feb. 12 Sold 9 Flat TVs to the Duke Hotel for $15,300
journal entry to record the purchase on January 18th would include which of the following?
5 x $1,400 = $7,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
92. Refer to the information above. The gross profit on the Flat TVs as of February 12th is:
A. $11,200.
B. $2,700.
C. $4,100.
D. $15,300.
$15,300 - (9 x $1,400) = $2,700
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-78
journal entry to record the sale on February 12th would include all of the following except:
B. A credit to Sales Revenue for $18,200.
D. A credit to Inventory for $15,300.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
94. Refer to the information above. Washington maintains a subsidiary ledger account for
each type of TV carried in the store. An examination of the account for the Flat TV model at
the end of February would show:
A. 4 units on hand with a total value of $1,400.
B. 4 units on hand with a total value of $5,600.
C. 13 units on hand with a total value of $18,200.
D. The amount that Washington owes to Bass.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-79
95. Beacon Food Stores purchased canned goods at an invoice price of $4,000 and terms of
2/10, n/30. Half of the goods had been mislabeled and were returned immediately to the
supplier. If Harvest Food pays the remaining amount of the invoice within the discount
period, the amount paid should be:
A. $1,920.
B. $1,960.
C. $3,920.
D. $4,000.
.98 (1/2 x $4,000) = $1,960
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
96. Berg Tooling reports net sales of $325,000, gross profit of $175,000, and net income of
A. $135,000.
B. $150,000.
C. $140,000.
D. $125,000.
$325,000 - $175,000 = $150,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Easy
6-80
97. VanRoy Supplies reports net sales of $1,750,000, net income of $175,000, and gross profit
A. $1,400,000.
B. $475,000.
C. $1,575,000.
D. $1,450,000.
$1,750,000 - $300,000 = $1,450,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
World of Sound is a small retail business that specializes in the sale of top-of-the-line sound
systems. This year, the store has begun to carry the Surround Sound manufactured by Carp
Co. Thus far, World of Sound has recorded the following transactions involving the Surround
Sound
May 5 Purchased 18 units at a unit cost of $2,400
May 18 Purchased 15 additional units at $2,550 each
June 12 Sold 19 units to the Davies Theater
98. If World of Sound uses a perpetual inventory system, the journal entry to record the
purchase on May 18th would include which of the following?
15 x $2,550 = $38,250
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-81
99. If World of Sound uses a perpetual inventory system, the journal entry to record the sale
on February 12th would include which of the following?
B. A credit to the Cost of Goods Sold for $45,750.
D. A debit to Inventory for $45,750
18 x $2,400 + 1 x $2,550 = $45,750
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
Bremmer uses a periodic inventory system and the following information is available:

A. $96,800.
B. $133,600.
C. $132,200.
D. $230,400.
Beginning Inventory ($21,200) + Purchases ($132,200) = Goods Available ($153,400) -

Ending Inventory ($19,800) = Cost of Goods Sold ($133,600)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-82

A. $96,800.
B. $133,600.
C. $132,200.
D. $230,400.
Sales ($230,400) - Cost of Goods Sold ($133,600) = $96,800
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
102. If Bounder Dog Supplies, Inc purchased inventory at $2,200 list price and the terms were
3/10 n/30, what would be the value associated with the inventory if payment was made within
10 days?
A. $2,268.
B. $2,334.
C. $2,200.
D. $2,134.
$2,200 x 97% = $2,134
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-83
103. Pet Foods Plus purchased bagged dog food at an invoice price of $6,000 and terms of
2/10, n/30. Half of the bags had been damaged in shipment and delivery was refused. If Pet
Foods Plus pays the remaining amount of the invoice within the discount period, the amount
paid should be:
A. $2,940.
B. $3,000.
C. $5,880.
D. $6,000.
98 (1/2 x $6,000) = $2,940
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
104. At the beginning of 2012, Wilson Stores has an inventory of $300,000. Because sales
A. $750,000.
B. $1,240,000.
C. $1,690,000.
D. $1,840,000.
$2,600,000 x (1 - .35) = $1,690,000 Cost of Goods Sold

$1,690,000 + $450,000 EI - $300,000 BI = $1,840,000 Purchases
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-84
105. If cost of goods sold is $360,000 and the gross profit rate is 40%, what is the gross
profit?
A. $240,000.
B. $360,000.
C. $600,000.
D. $900,000.
$360,000/.60 = $600,000 (Sales); $600,000 x .4 = $240,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
Essay Questions
6-85
106. Accounting terminology Listed below are nine technical accounting terms introduced in
this chapter:
Gross profit
Gross profit rate
General ledger
Cost of goods sold
Physical inventory
Subsidiary ledger
Perpetual inventory system
Periodic inventory system Inventory shrinkage
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided below each statement, indicate the accounting term described, or answer
"None" if the statement does not correctly describe any of the terms.
____ a. An approach to accounting for inventories and the cost of goods sold used primarily in
small businesses with manual accounting systems.
____ b. A reason why perpetual inventory records may not be entirely accurate.
____ c. The difference between the revenue earned by selling merchandise and the cost of
goods sold.
____ d. Gross profit divided by average total stockholders' equity.
____ e. An accounting procedure used in both perpetual and periodic inventory systems. In a
perpetual system, this procedure brings to light the amount of inventory shrinkage. In a
periodic system, it is the basis for computing the cost of goods sold.
____ f. An accounting record showing the individual items comprising the balance of a
general ledger account.
____ g. The accounting record in which transactions initially are recorded.
(a) Periodic inventory system; (b) Inventory shrinkage; (c) Gross profit; (d) None (Gross
profit rate is gross profit divided by net sales); (e) Physical inventory; (f) Subsidiary ledger;
(g) None (The statement describes a journal)

Bloom's: Remember
Difficulty: Easy
Topic: Merchandising Activities
6-86
107. Effects of transactions upon the accounting equation Listed below are selected
transactions of Simon's, a retail store which uses a perpetual inventory system:
(a) Purchased merchandise on account.
(b) Made an entry to recognize the revenue from a sale of merchandise on account. (Ignore
the cost of goods sold.)
(c) Recognized the cost of goods sold relating to the sale in Transaction b.
(d) Collected in cash the account receivable from the customer in Transaction b.
(e) Following the taking of a physical inventory at year-end, made an adjusting entry to record
a normal amount of inventory shrinkage.
Indicate the effects of each of these transactions upon the elements of the company's financial
statements. Organize your answer in tabular form, using the column headings shown below.
(Notice that the cost of goods sold is shown separately from all other expenses.) Use the code
letters I for increase, D for decrease, and NE for no effect. The answer for Transaction a is
provided as an example.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
6-87
108. Subsidiary ledgers Listed below are several merchandising transactions of Siegel's
Garden Center, a garden supply store.
(a) Purchased merchandise from Bayview Wholesale on account.
(b) Sold merchandise for cash.
(c) Sold merchandise on account to Dom's Landscaping Co.
(d) Paid the account payable to Bayview Wholesale.
(e) Collected the account receivable from Dom's Landscaping Co.
Among the accounting records maintained by Siegel's are subsidiary ledgers for inventory,
accounts receivable, and accounts payable.
For each of the five transactions, you are to indicate any subsidiary ledger (or ledgers) to
which the transaction would be posted. Use the code:
Inv = Inventory subsidiary ledger
AR = Accounts receivable subsidiary ledger
AP = Accounts payable subsidiary ledger
Also indicate whether each posting causes the balance in the subsidiary ledger account to
increase or decrease. Organize your answer in tabular form as illustrated below. The answer
for transaction a is provided as an example.
6-88

Bloom's: Understand
Difficulty: Medium
109. Perpetual inventory system: basic entries Renato Company uses a perpetual inventory
system. A partial chart of accounts is shown below, followed by a series of merchandising
transactions. Indicate the accounts that should be debited and credited in recording each
transaction. (Ignore sales taxes.)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-89
110. Perpetual inventory system: transactions and closing entries Danny's Wholesale
Company uses a perpetual inventory system. A partial chart of accounts is shown below,
followed by a series of merchandising transactions. Indicate the accounts that should be
debited and credited in recording each transaction. (Ignore sales taxes.)
6-90
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
111. Periodic inventory system Soundview Centre uses a periodic inventory system. At the
end of 2010, the accounting records include the following information:
Compute the following for 2010:
(a) Cost of goods sold: $190,200
(b) Gross Profit: $127,800
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-91
112. Periodic inventory system Armstrong Creation uses a periodic inventory system. During
the current year, the company purchased merchandise at a cost of $245,000. You are to
compute the cost of goods sold under each of the following alternative assumptions:
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-92
113. Gross profit The table below contains information from a recent annual report of Molloy,
Inc. (Dollar amounts are stated in millions.) Fill in the missing amounts.
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
6-93
114. Gross profit rates a practical application

Note to instructor: The following exercise requires students to use gross profit rates in a
manner not specifically illustrated in the chapter. We view this as an exercise in critical
thinking and, as such, it is more challenging than the typical exercise. Part d requires an
expository answer. Some instructors may choose to omit part d.
Your store sells computers and software. The average computer sells for $1,350, but the
customer buying a computer also buys an average of $750 in software. You earn only 10%
gross profit rate on sales of computers, but you make a 40% gross profit rate on software. You
currently are selling 150 computers per month.
(a) What is the total amount of your monthly gross profit? $________________
(b) To increase sales, you are thinking about selling computers at cost ($1,215.) This would be
the "cheapest price in town," and should attract more customers. You expect each customer
who buys a computer to also buy $750 worth of software. Under these assumptions, how
many computers must you sell each month in order to earn the same amount of gross profit as
you are earning now?
(c) Assume that as a result of reducing the sales price of computers to cost ($1,215), you are
able to sell 250 computers each month, and that each customer now buys $850 worth of
software. What will be the total amount of your monthly gross profit?
(d) Assume that you achieve the results specified in part c (250 sales transactions per month,
including an average of $850 in software). Would you consider the policy of selling
computers at cost successful or unsuccessful? Explain specifically why this strategy is
working out favorably or unfavorably.
6-94
Note to instructor: You may wish to point out that this computation represents an introduction
to cost-volume-profit analysis (or break-even analysis). This type of analysis is useful in
assessing the potential impact of many proposed marketing strategies. The topic is addressed
in depth in the management accounting course.
(d) The policy of selling computers at cost appears modestly successful, increasing the
monthly gross profit from $65,250 to $85,000. There are two factors leading to the success of
this strategy. The first is an increase in sales transactions to 218 computer sales per month
instead of 150. But as shown in part b, an increase to 218 sales per month would not in itself
make this strategy successful. The reason that total monthly profit margin increased is that the
average customer is now buying more software.
AACSB: Analytic
AICPA FN: Decision Making
Bloom's: Analyze
Difficulty: Hard
6-95
115. Net sales and gross profit

Mayflower Supply House had gross sales revenue of $1,700,000, cost of goods sold of
$950,000, sales returns and allowances of $52,500, and allowed sales discounts of $30,000.
Compute for the year:
(a) Net sales: $1,617,500 = ($1,700,000 - $52,500 - $30,000)

(b) Gross profit: $667,500 = ($1617,500 - $950,000)
(c) Gross profit rate: 41.3% = [$667,500 (part b)  $1,617,500 (part a)]
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
6-96
116. Journal entries for merchandising transactions Shown below is a partial chart of accounts
for Main Street Markets, followed by a series of merchandising transactions. The company
uses a perpetual inventory system, records purchases at net cost, and records sales at the full
invoice price. Sales taxes are collected on all sales, and the sales tax liability is recorded
immediately. Freight charges on inbound shipments are recorded in the Transportation-in
account.
Indicate the accounts that should be credited in recording each transaction by placing the
appropriate account number(s) in the space provided.
6-97
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
Topic: Transactions Relating to Purchases and Sales
6-98

Briefly distinguish between a perpetual inventory system and a periodic inventory system.
Students' answers should address most of the following points:

In a perpetual inventory system:
Inventory and Cost of Goods Sold accounts are kept continuously up-to-date, reflecting the
effects of the merchandising transactions as they occur.
The system requires recording the cost of sales transactions on a timely basis. Often, this is
practicable only with a computer-based accounting system.
This method is used by virtually all businesses with extensive interim reporting requirements
(publicly owned companies), or which must continuously know the quantities of various types
of merchandise on hand.
In a periodic inventory system:
No effort is made to keep the Inventory account up-to-date, or to record the cost of goods sold
as sales take place.
The amounts of inventory on hand and the cost of goods sold are not determined until a
complete physical inventory is taken, usually only at year-end.
The method is used primarily by small businesses with manual accounting systems, and with
few external reporting requirements.
AACSB: Communications
Bloom's: Understand
Difficulty: Medium
6-99

Indicate whether you would expect each of the following businesses to maintain a perpetual
or a periodic inventory system. Explain the reasoning behind your answers:
(a) A jewelry store.
(b) A roadside vegetable stand.
Students' answers should address most of the following points:

(a) A jewelry store probably would maintain a perpetual inventory system, for the following
reasons:
Items have different per-unit costs. Therefore, management needs detailed information about
the cost of specific units sold in order to properly measure income.
Because the items are expensive and subject to theft, management needs detailed records of
the items in inventory and their cost, to recognize when shrinkage losses occur, to measure
such losses, and to support theft-insurance claims.
Because the volume of sales transactions is relatively low, it would not be difficult or costly to
maintain a perpetual inventory system.
(b) A roadside vegetable stand probably would maintain a periodic inventory system, for the
following reasons:
Management has no need of perpetual inventory records to see what is in stock.
It would be difficult to determine the per unit cost of vegetables, as they probably are
purchased in bulk. Also, it would be impractical to record the cost of each sales transaction.
The company does not need an elaborate accounting system; it probably has no external
reporting requirements other than income tax returns.

AICPA BB: Industry
Bloom's: Understand
Difficulty: Medium
6-100

Bookmarks, Inc. sells used books at its store in the resort community of Lake Bryn Mawr. The
owner maintains a large inventory of used books purchased from estate sales, flea markets,
and customers. During the tourist seasons of summer and winter, the store is exceptionally
busy with customers. Each customer usually makes small purchases ranging in amount from
one to twenty dollars. What type of inventory system would you recommend to the owner of
Bookmarks, Inc.? Explain the reasoning behind your advice.
The owner would be well advised to use a periodic inventory system. Sales during the store's
busy seasons are occurring in high volume and are individually of low value. Up-to-date
information regarding the cost of goods sold and the value of the existing inventory would not
seem to be worth the cost of installing point of sale terminals. A manual perpetual system
would impose time costs that would likewise be difficult to justify in terms of the value of the
information obtained.
AACSB: Analytic
AICPA BB: Industry
Bloom's: Understand
Difficulty: Medium
6-101
120. Subsidiary ledgers Explain the nature of subsidiary ledgers, and give two specific
examples. For each of these examples, explain (1) the unit of organization within this ledger,
and (2) the usefulness of this ledger in business operations.
Subsidiary ledgers provide detailed information about the individual items that comprise the
balance of a general ledger account.
Students are asked to provide two examples of subsidiary ledgers, stating the unit of
organization and usefulness of the ledger in business operations. Usually, students select two
of the following:
Inventory subsidiary ledger. Organized by type of product. Used to determine quantities of the
product currently on hand, quantities sold recently, and recent purchase costs relating to the
product.
Accounts receivable subsidiary ledger. Organized by customer (name or account number).
Used in billing customers, evaluating the customers' credit history with the business, and in
enforcing credit limits.
Accounts payable subsidiary ledger. Organized by creditor. Used in paying creditors and in
monitoring the volume of business done with a specific supplier. Of course, students may
identify other subsidiary ledgers. Several are described in the text.
Bloom's: Understand
Difficulty: Medium
6-102
121. Using gross profit rates Explain how the gross profit rate for a particular product is
determined. How would you expect the manager of a large department store to use these gross
profit rates in deciding which products to feature in the store's window displays and in
determining the location of various types of merchandise within the store? Explain.
The gross profit rate of a particular product is determined as follows:
Most businesses seek to maximize sales of those products with the highest gross profit rates
(profit margins). Therefore, the store manager wants customers to be aware of these products,
and to see them in an appealing setting. The manager logically would feature high-margin
products in the window displays. Also, the manager will locate high-margin products where
they will be seen by all customers such as on the main floor, near the main entrance. Low-
margin items usually are displayed in space off of the main traffic areas, such as the top floor,
corners of the store, and the "bargain basement."
Bloom's: Understand
Difficulty: Medium
6-103
122. A customer purchased merchandise for $450 which cost the seller $200. The customer
was dissatisfied with some of the goods and thus returned $100 worth and received a cash
refund.
(a) What journal entries should the seller make when the merchandise is sold and at the time
of the return? Assume that the seller uses a perpetual inventory system.
(b) If the seller uses a periodic inventory system, what entries would be made?
(a.)
(b.)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
6-104
123. Prepare journals entries for the following, assuming the company uses a perpetual
inventory method and records purchases at their net amounts.
6-105
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
Topic: Transactions Relating to Purchases and Sales
124. Which of the following businesses is most likely to use a periodic inventory system?
A. An aircraft manufacturer.
B. A supermarket that is part of a national chain.
C. An independently owned art gallery with a manual accounting system.
D. A beer bar.
125. A periodic inventory system eliminates the need for:

A. Taking an annual physical inventory.
B. Recording the revenue from sales transactions.
C. Recording the cost of merchandise sold as sales occur.
126. If management wants to know the cost and quantity of merchandise on hand at all times,
the business will probably:
A. Use a periodic inventory system.
B. Maintain an inventory subsidiary ledger.
C. Take a complete physical inventory each day.
D. Debit all purchases of merchandise directly to the Cost of Goods Sold account.
127. In a perpetual inventory system, the entry to record the cost of goods sold always
includes an entry of equal amount to the:
A. Inventory account.
B. Sales account.
C. Purchases account.
6-106
128. Prior to taking a physical inventory at year-end, the perpetual inventory records of
Athena Designs showed an inventory of $26,000, sales of $358,000, and a cost of goods sold
of $215,000. The year-end physical inventory indicated merchandise on hand costing
$24,000. The company's gross profit for the year was:
A. $334,000.
B. $145,000.
C. $141,000.
At the end of last year, Helen's, Inc. had merchandise costing $115,000 in inventory. During
January of the current year, the company purchased merchandise costing $35,000, and sold
merchandise which it had purchased at a total cost of $55,000.
Based upon the above information, place the best answer in the space provided. In questions 1
through 3, assume that Helen's uses a perpetual inventory system.
A. $0.
B. $35,000.
C. $55,000.

A. $35,000.
B. $205,000.
C. $95,000.
A. $0.
B. $35,000.
C. $55,000.
6-107
Assume that Jerome's, Inc. uses a periodic inventory system and takes a physical inventory
only at year-end.
A. $0.
B. $35,000.
C. $55,000.

A. $0.
B. $105,000.
C. $115,000.
A. $0.
B. $35,000.
C. $55,000.
Essay Questions
6-108
135. At the end of last year, Baron's Bazaar had merchandise costing $381,000 in inventory.
During January of the current year, the company purchased merchandise costing $133,500,
and sold merchandise which it had purchased at a total cost of $109,300.
a. Assume that Baron's Bazaar uses a perpetual inventory system.
$________________
$________________
$________________
b. Assume that Baron's Bazaar uses a periodic inventory system and takes a physical
inventory only at year-end (December 31). (Note: $0 may be an appropriate answer to one or
more of the following questions.)
$________________
$________________
$________________
a. (1) $133,500 (The merchandise purchases)

(2) $405,200 ($381,000 + $133,500 - $109,300)
(3) $109,300 (The cost of merchandise sold)
b. (1) $-0- (In a periodic system, merchandise purchases are debited to the
Purchases account, not the Inventory account)
(2) $381,000 (The balance at the beginning of the month)
(3) $-0- (In a periodic system, no entries are made to transfer costs as sales occur from the
Inventory account to the Cost of Goods Sold account)
6-109
136. Phillips Co. is an office supply store. The company uses a perpetual inventory system,
records purchases at net cost, and records sales revenue at full invoice price.
Record the following transactions in the company's general journal. To conserve space, you
may omit the written explanations which normally should accompany the entries.
July 1 Purchased four Lorac copying machines on account from Lorac Corp. Total invoice
price was $2,500 per machine ($10,000 total); terms of 2/10, n/30. These machines are
intended for resale.
3 Found one of the Lorac copiers to be defective and returned it to Lorac, thus reducing the
amount owed.
9 Sold one of the Lorac copiers to Morris Realty. The sales price was $3,500, terms 5/10,
n/60.
10 Paid the remaining amount owned to Lorac Corp., less the allowable discount.
19 Received full payment from Morris, less the allowable discount.
6-110
6-111
137. Mark and Amanda Carter own an appliance store and a restaurant. The appliance store
sells merchandise on a 12-month installment plan; the restaurant sells only for cash. (More
than one of the following answers may be correct.)
A. The appliance store has a longer operating cycle than the restaurant.
B. The appliance store probably uses a perpetual inventory system, whereas the restaurant
probably uses a periodic system.
C. Both businesses require subsidiary ledgers for accounts receivable and inventory.
D. Both businesses probably have subsidiary ledgers for accounts payable.
138. Which of the following statements about merchandising activities is true? (More than
one answer may be correct)
A. As inventory is purchased, the Inventory Expense account is debited and Cash (or
Accounts Payable) is credited.
B. Inventory is recorded as an asset when it is first purchased.
C. As inventory is sold, its cost is transferred from the balance sheet to the income statement.
D. As inventory is sold, its cost is transferred from the income statement to the balance sheet.
139. Marietta Corporation uses a perpetual inventory system. All of its sales are made on
account. The company sells merchandise costing $3,000 at a sales price of $4,300. In
recording this transaction, Marietta will make all of the following entries except:
A. Credit Sales, $4,300.
B. Credit Inventory, $3,000.
D. Debit one or more accounts in the inventory subsidiary ledger for amounts totaling $3,000.
140. Fashion House uses a perpetual inventory system. At the beginning of the year,
inventory amounted to $50,000. During the year, the company purchased merchandise for
$230,000, and sold merchandise costing $245,000. A physical inventory taken at year-end
indicated shrinkage losses of $4,000. Prior to recording these shrinkage losses, the year-end
balance in the company's Inventory account was:
A. $31,000.
B. $35,000.
C. $50,000.
6-112
141. Best Hardware uses a periodic inventory system. Its inventory was $38,000 at the
beginning of the year, and $40,000 at the end. During the year, Best made purchases of
merchandise totaling $107,000. Identify all of the correct answers:
A. To use this system, Best must take a complete physical inventory twice each year.
B. Prior to making adjusting and closing entries at year-end, the balance in Best's Inventory
account is $38,000.
C. The cost of goods sold for the year is $109,000.
D. As sales transactions occur, Best makes no entries to update its inventory records or record
the cost of goods sold.
142. The two basic approaches to accounting for inventory and the cost of goods sold are the
perpetual inventory system and the periodic inventory system. (More than one of the
following statements may be correct.)
A. Most large merchandising companies and manufacturing businesses use periodic inventory
systems.
B. As a practical matter, a grocery store or a large department store could not maintain a
perpetual inventory system without the use of point-of-sale terminals.
C. In a periodic inventory system the cost of goods sold cannot be determined until a
complete physical inventory is taken.
D. In a perpetual inventory system, the Cost of Goods Sold account is debited promptly for
the cost of merchandise sold.
143. Big Brother, a retail store, purchased 100 television sets from Krueger Electronics on
account at a cost of $200 each. Kruger offers credit terms of 2/10, n/30; Big Brother uses a
perpetual inventory system and records purchases at net cost. Big Brother determines that 10
of these television sets are defective and returns them to Krueger for full credit. In recording
this return, Big Brother will:
A. Debit Sales Returns and Allowances, $1,960.
B. Debit Accounts Payable, $1,960.
D. Credit Inventory, $2,000.
6-113
144. Two of the lawn mowers sold by Garden Products Co. are the Lawn Master and the Mark
5. Lawn Masters sell for $250 apiece, which results in a 35% profit margin. Each Mark 5
costs Garden Products $300 and sells for $400. Indicate all correct answers.
A. The dollar amount of gross profit is greater on the sale of a Mark 5 than a LawnMaster.
B. The gross profit margin is higher on Mark 5s than on LawnMasters.
C. Garden profits relatively more by selling one Mark 5 than one LawnMaster.
D. Garden profits more by selling $2,000 worth of Mark 5s than $2,000 worth of
LawnMasters.
6-114

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Chapter 06 - Merchandising Activities

True / False Questions

2. The operating cycle of a merchandising company consists of (1) purchases of merchandise;

3. Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage,

4. In a perpetual inventory system, when merchandise is purchased, it is debited to an account

29. The average gross profit margin is a measure of relative profitability.

Multiple Choice Questions

31. Operating income is:

32. Sales discounts and allowances:

33. Which account listed below is classified as a contra-revenue account?

34. The Cost of Goods Sold account is closed by:

41. Sales revenue is recognized in the period in which:

45. Gross profit is the difference between:

46. The credit term 2/10, n/30 means:

47. The basic purpose of a subsidiary ledger is to:

52. In a perpetual inventory system:

53. Net sales is calculated by:

59. The cost of delivering merchandise to the customer is:

60. In a periodic inventory system, the cost of goods sold is:

62. Periodic inventory systems are used primarily by:

63. Inventory shrinkage is not caused by:

65. The cost of the transportation of inventory purchased:

66. A company's gross profit rate is computed by dividing:

68. To arrive at net sales:

71. The Sales Returns and Allowances account is debited when:

74. The gross profit margin:

76. When making sales, the sales taxes received are:

79. The following information is available:

Calculate the gross profit:

87. What is the cost of goods sold?

88. What is the gross profit?

100. What is the cost of goods sold?

101. What is the gross profit?

Compute the following for 2010:

114. Gross profit rates a practical application

115. Net sales and gross profit

117. Inventory systems

118. Inventory systems

119. Inventory systems

Multiple Choice Questions

125. A periodic inventory system eliminates the need for:

130. The balance in the Inventory account at January 31 was:

133. The balance in the Inventory account at January 31 was:

Multiple Choice Questions

Chapter 06 Merchandising Activities Answer Key

True / False Questions

AACSB: Reflective Thinking

2. The operating cycle of a merchandising company consists of (1) purchases of merchandise;

AACSB: Reflective Thinking

3. Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage,

AACSB: Reflective Thinking

4. In a perpetual inventory system, when merchandise is purchased, it is debited to an account

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking